Further authority on exclusion clauses in insurance contracts: Court of Appeal upholds exclusion clause in favour of defendant/respondent engineer
Court of Appeal upholds exclusion clause in favour of defendant/respondent engineer and finds that the Canada Steamships guidelines, in so far as they survive, are now more relevant to indemnity clauses than to exemption clauses.
Summary
- In commercial contracts to which UCTA does not apply there is a growing recognition that parties should be free to allocate risks as they see fit. The wording of the exclusion clauses in this case was sufficiently clear to demonstrate the risk allocation agreed by the parties; accordingly, neither the contra proferentem rule nor the Canada Steamship principles would allow the claimant developers to interpret the clauses in such a way as to exclude liability.
- In the context of major construction contracts: “…Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down. Contractors and consultants who accept large risks will charge for doing so and will no doubt take out appropriate insurance. Contractors and consultants who accept lesser degrees of risk will presumably reflect that in the fees which they agree.”
- In commercial contracts, the 1952 Canada Steamships guidelines (if they survive at all) are now more relevant to indemnity clauses than to exclusion clauses.
- This decision further demonstrates the shift in the approach and softening of the courts to limitation and exclusion clauses since the enactment of UCTA.
- It is the latest in a recent line of authority from the Court of Appeal (and higher courts - see Impact Funding v AIG (2016)) in relation to the proper interpretation of limitation and exclusion clauses. See our elexica article for more details.
Background
Persimmon Homes, Taylor Wimpey and BDW Trading (the Developers) were part of a consortium of house builders who bought and developed a large site in Wales near Cardiff. The Respondents, Arup, acted as engineers on the project.
Arup were engaged by the Developers over many years and in various capacities. Accordingly, the parties had entered into a number of agreements. Upon discovery of asbestos on site, the Developers took the view that Arup had been negligent in failing to identify and report upon that asbestos at an early stage and sought damages for breach of contract, negligence and breach of statutory duty. The following contractual terms of the 2009 contract and corresponding 2010 deeds of warranty agreed between Arup and the Developers became relevant (the Exclusion Clauses):
“The Consultant’s aggregate liability under this [Agreement/Deed] whether in contract, tort (including negligence), for breach of statutory duty or otherwise (other than for death or personal injury caused by the Consultant’s negligence) shall be limited to [£12,000,000.00/£5,000,000.00] with the liability for pollution and contamination limited to £5,000,000.00 (five million pounds) in the aggregate. Liability for any claim in relation to asbestos is excluded.”
Arup denied liability for a number of reasons, and contended that their liability (if any) in respect of the asbestos was excluded by virtue of the Exclusion Clauses.
The Developers argued that “liability for” meant “liability for causing” pollution, contamination or asbestos and the Exclusion Clauses should be restricted accordingly, relying on the “_contra proferentem_” rule which requires any ambiguity in an exemption clause to be resolved against the party who put the clause forward and relies upon it. The Developers also relied on the well-established Canada Steamship principles, which dealt with exclusion and indemnity clauses together and set down a three stage test to determine whether negligence was covered.
Judgment at first instance
At a preliminary issue hearing in the TCC, Mr Justice Stuart-Smith agreed with Arup’s interpretation of the Exclusion Clauses and refused to apply the restrictive interpretation proposed by the Developers. The judge noted the shift in the approach of the courts to limitation and exclusion clauses due (i) to the enactment of UCTA; and (ii) “increasing recognition that parties to commercial contracts are and should be left free to apportion and allocate risks and obligations as they see fit, particularly where insurance may be available to one or other or both parties to cover the risks being so allocated” (paragraph 25).
The Exclusion Clauses represented an agreed allocation of risks between the parties; their meaning was clear and the courts should give effect to that meaning. The Exclusion Clauses were upheld and barred all claims for asbestos, including those pleaded in the particulars of claim, and limited Arup's liability in respect of other contamination to £5m.
Judgment at Court of Appeal
The Court of Appeal (led by Lord Justice Jackson) has upheld the TCC’s decision unanimously, on the following basis:
- Both the language used by the parties and any application of business common sense lead to the same conclusion - the Developers’ interpretation of the Exclusion Clauses was not feasible.
- The meaning of the Exclusion Clauses was clear and should be given effect to.
- Accordingly, the contra proferentem rule did not impact the resolution of the preliminary issues in this case.
- At any rate, in commercial contracts the Canada Steamships guidelines (in so far as they survive, which has been questioned over the last 66 years) are now more relevant to indemnity clauses than to exemption clauses. Accordingly, “the Canada Steamships line of cases are of very little assistance in the present case” (paragraph 59).
Conclusion
This decision is the latest in a recent line of authority from the Court of Appeal (and higher courts - see Impact Funding v AIG) in relation to the proper interpretation of limitation and exclusion clauses.
In commercial contracts to which UCTA does not apply there is a growing recognition that parties should be free to allocate risks as they see fit, and limitation and exclusion clauses should be interpreted in accordance with the natural meaning of the words used, not more widely.
In the context of major construction contracts: “…Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down. Contractors and consultants who accept large risks will charge for doing so and will no doubt take out appropriate insurance. Contractors and consultants who accept lesser degrees of risk will presumably reflect that in the fees which they agree.”
The Canada Steamship principles now have limited effect in relation to the interpretation of exclusion clauses.
